How to avoid noisy market

[bmcgraw393]

We all know that noise is the only reason we all aren't rich yet... right. So what is the best possible way to determine if you are currently in a noisy market (other than by the naked eye). Avoiding noise is extremely important for traders like myself (scalpers/day traders). Those who use Bollinger bands or moving averages to find a buy point may receive false signals from candles that move rapidly up or down, but fail to take a trend. The purpose of this thread is for people to share their ideas on how to avoid a noisy market.

An example of a noisy market can be seen here:

One can see that the closing prices of each candle are all over the place rather than a nice clean trend like so:

Other noisy markets can take a particular direction like so:

Noisy markets can make it hard for traders to determine proper buy and sell points . So how do we calculate or indicate that we are currently in a noisy market? Some people may say that it is best to use the standard deviation or the random walk index, but is there a better way? Maybe finding the ratio of buys vs sells, or a hybrid of momentum and standard deviation?


What is your best method?

 

[Shooters_Gotta_Shoot]

Have you ever tried Renko charts? I had the same issues with choppy markets and Renko charts are based on price movement instead of time or volume. They smooth things out significantly by only plotting when the price moves. Helps me a lot, but there is no perfect solution!

 

[bmcgraw393]

Have you ever tried Renko charts? I had the same issues with choppy markets and Renko charts are based on price movement instead of time or volume. They smooth things out significantly by only plotting when the price moves. Helps me a lot, but there is no perfect solution!

I have not! Is this a thinkorswim chart type?

 

[Shooters_Gotta_Shoot]

I have not! Is this a thinkorswim chart type?

Yeah! Go into the ‘time frame’ tab of your chart and click on ‘Range’ then pick your desired price range. Then go to the ‘Style’ tab and find the ‘range type’ tab and select ‘Renko bars’.

 

[bmcgraw393]

Yeah! Go into the ‘time frame’ tab of your chart and click on ‘Range’ then pick your desired price range. Then go to the ‘Style’ tab and find the ‘range type’ tab and select ‘Renko bars’.

Thank you for the insight! These look pretty amazing!

 

[rad14733]

Another option is Hiekin Ashi candles which can be selected the same way as Renko Bars, under Style... They are also smoothing/trending candles... One advantage of Hiekin Ashi candles is that they can be used with both Time and Ticks whereas Renko Bars can only be Tick or ATR based, with ATR being a self-adjusting Tick setting...

There are several chop indicators out there that can help avoid false/bad entries... Some work better than others... Unfortunately, there is no perfect solution so some due diligence is required...

 

[scott69]

I guess I am pretty old-fashioned, and consider myself a disciple of Wells Wilder, so I defer to the ADX on different time frames to tell me if a price chart is trending or not. Also, you can put smaller MAs over price, and they will flatten out in a range. MACD is just MAs and will do the same. +DI & -DI will also flatten out and congest. In addition, any experienced trader will be able to just look at a chart and tell if it is trending or in a range. It is paramount for any trader to learn to recognize a congestion area, big or small. The most important thing you can do if you don't trade in ranges and only trade in trends is to be able to determine if price is leaving a congestion zone. I rely on ADX to do that as well. For range trading, an old rule of thumb is low or falling ADX, Stochastic will give you highs and lows in a congestion area. Rising ADX, ignore Stochastic. Some of the more clever and complex indicators here can also decipher range/trend, but they are usually derivatives of the simpler and older "tried-and-true" indicators that I mentioned. You can get as complex as you can but always make sure you understand exactly what your indicator does and what its strengths and weaknesses are. The useThinkscript gang can help with that, too. Some great stuff and great coders/traders here.

 

[bmcgraw393]

@rad14733 I have actually been using the Hiekin Ashi candles for a while now! However, I didn't realize that you can use them with Ticks. Thank you!

@scott69 Thank you for your input! I really like the ADX indicator. I built a program that automatically trades for me throughout the day. teaching my software what is good/bad is hard because most trades are made based off of a good feeling.